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Comprehensive Financial Planning

What Are Your 401k and Other Qualified Plan Rollover Options?

Options

1. Cash it out
2. Roll it into a self-directed IRA
3. Keep your account where it is and do nothing
4. Roll it into your new company's 401k (if allowable)
5. Questions you should ask before opening an IRA to roll your 401(k) into
6. New Section Every Investor Should Read-How to Manage Investment Risk

1. Should you cash out your retirement account?

If you are younger than 59 1/2, taking a premature distribution may not be in your best interest. Consult your persona certified financial planner and/or tax advisor to determine the tax consequences involved.  If  you are under 59 1/2, there may be an additional penalty tax besides having to claim any distributions as ordinary income.  The penalty tax for non-qualified distribution is 10% but for a SIMPLE IRA if you have participated less than two years, the penalty tax is 25%.

Keep in mind, the money you have invested in your retirement account is compounding tax-deferred at an exponential rate.  Click here (Future Value Chart) to see how your current principle could grow at different rates of returns over a given period of time. The following is an example of tax-deferred growth compounding over a given period of time.

EXAMPLE 1:  The following example assumes all distributions and gains were reinvested, the investments compounded at an annual rate of 10%, and all earnings were tax-deferred.  This example is shown for illustrative purposes only.  It is purely hypothetical and is not intended to imply the past or expected future investment results.  Joe and Marge in the following example are the same age and will both retire at the same time at age 65.

At age 25, Joe begins investing $2,000 every year into his 401k and stops after 10 years. 

At age 35, Marge begins investing $2,000 a year into her 401k and continues to invest every year for the next 30 years.

Joe has invested a total of $20,000 over a ten-year period.  The value of Joe's $20,000 investment after 40 years when he is age 65 will be worth $584,006.

Marge has invested a total of $60,000 over a thirty-year period.  The value of Marge's $60,000 investment after 30 years when she is age 65 will be worth $345,437.  This is $238,569 dollars less than Joe's even though Marge invested $40,000 more.  Which investor would you want to be?

Note: If Joe had not stopped making his $2,000 a year contribution and continued contributing for the remaining 30 years, his investment would have been worth $975,704 by the time he was age 65.

2. Should you roll your retirement account into a self-directed IRA? 

Rolling your 401k or other qualified retirement plan from your previous employer to a self-directed IRA may be your best option.  If you keep your retirement account with your previous employer, your investment options are usually extremely limited to a few mutual funds and/or the company's stock.  In addition, the company is probably not providing you with the level of service you could obtain elsewhere.  

Retirement planning goes well beyond the selection of investments.  Retirement planning is a comprehensive approach covering the financial planning process including, insurance planning, investment planning, tax planning, planning for college, employee benefits, estate planning, as well retirement planning (click here, for a list of topics your advisor should be familiar with).  Quality management begins with properly assessing your financial goals, objectives and risk tolerance.  After which, a strategically diversified portfolio should be constructed unique to you and appropriate for current market conditions.  As the economic environment changes as well as your financial goals, objectives, and risk tolerance, your portfolio should be reviewed and adjusted to reflect such changes.

Furthermore, named beneficiaries of an IRA other than a spouse have a tax advantage with distributions not available with employer qualified retirement plans.  Named beneficiaries of an IRA are able to stretch the required distribution over their life expectancy deferring income tax allowing funds to continue to compound exponentially.  Beneficiaries of qualified plans to not have this option.  This can be especially troublesome for large estates subject to estate taxes.  Estate taxes are roughly 45% (and changing).  If an IRA distribution is necessary to pay for the estate tax, the beneficiary is hit with an income tax in addition to the estate tax.  Distributions from Roth IRAs are not subject to income taxes for the IRA holder or beneficiaries.

If you roll a qualified plan from your employer to a self-directed IRA, you can select from Privately Managed Accounts or PMAs, Electronically Traded Funds or ETFs, just about any mutual fund available-load or no-load, any listed stock, bonds, unit investment trusts, money markets, and other investment vehicles.  Not only will you have more investment options to choose from, you will also have the quality of service you deserve.   

Click here if you are considering a rollover to a self-directed IRA.

When you roll your retirement account to a self-directed IRA you should not incur any tax liability providing the Rollover is done correctly.  Please consult a financial representative, personal tax advisor and/or current plan advisor to ensure a proper rollover.  

3. Keep your account where it is and do nothing.

Most employers will allow you to maintain your retirement account in their plan even if you leave the company.  Please read option 2 above if you are considering this.

4. Roll it into your new company's 401k (if allowable)

Some companies will allow you to rollover your previous qualified retirement plan into their retirement plan.  This option limits your investment choices substantially compared to the choices offered in a self-directed IRA.  In addition, you lose tax advantages for your heirs that are available with an IRA but not a 401(k).  You can borrow from a 401(k) but you cannot borrow from an IRA.  You cannot convert a 401(k) to a Roth IRA.  However, you can roll your 401(k) to a Traditional IRA and then convert the Traditional IRA to a Roth IRA.

5. Questions you should ask before initiating a 401(k) or other qualified plan rollover

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